CREATING A LOCAL WIND INDUSTRY

Experience from Four European Countries

by Søren Krohn

Managing Director, Danish Wind Turbine

Manufacturers Association

for Helios Centre

Testimony on behalf of the

Regroupement national des Conseils Régionaux de l’environnement duQuébec

before the Régie de l'énergie du Québec

May 4th, 1998

Author's Note

The following paper is strictly attributable to the author, and does not necessarily reflect the views or

positions of the Danish Wind Turbine Manufacturers Association.

The perspective of the author is European, and many examples are from the experience of Danish

manufacturers. Colleagues in Denmark and abroad have kindly reviewed the country reports and the

technical appendix. In particular I should like to thank Steffen Damborg of the Danish Wind Turbine

Manufacturer’s Association, Gaynor Hartnell of the British Wind Energy Association, Peter Hjuler

Jensen of the Risø National Laboratory in Denmark, Andreas Wagner of the German Wind Energy

Association and Per Krogsgaard, Kell Øhlenschlæger and Birger T. Madsen of the firm BTM Consult.

TABLE OF CONTENTS

NOTES II

INTRODUCTION VI

CHAPTER ONE : THE WIND TURBINE MARKET IN DENMARK 1

1. Wind Resources 1

2. Wind Generation Structure 1

3. Renewable Energy Policy for Wind 1

4. The Energy Policy Role of Power Companies 2

5. Power Companies' Ownership of Wind Power 3

6. Attitudes to Wind Energy in Power Companies 3

7. Public Service Obligations 4

8. Municipal Planning 4

9. Advanced Wind Resource Mapping 5

10. Market Development Schemes 5

11. Pricing of Wind Energy from Independent Power Producers 6

12. Partial Refund of CO2 and Energy Tax 6

13. Special Rules for Private (Individual or Co-operative) Owners 7

14. Grid Connection, Grid Reinforcement 8

15. Tax Treatment of Wind Turbine Investments 8

16. Limitation on Private Ownership 8

17. Market Size 9

18. Turbine and Component Suppliers 9

19. Employment 10

20. The Home Market's Role in Industry Development 10

21. The Danish Concept 11

22. Can the Danish Industrial Success be Replicated? 11

23. Origin and Mainstay of the Market: Private Citizens 12

24. The Benefits of Thorough Statistical Coverage 12

25. The Role of Publicly Financed R&D 13

26. Type Approval Requirements 13

27. The Role of Risø National Laboratory and Others 14

28. The Role of Power Companies in R&D 14

29. Is the Danish Market System an Economic Success? 14

30. Rationing Gives Questionable Market Efficiency 15

CHAPTER TWO : THE WIND TURBINE MARKET IN GERMANY 17

31. Wind Resources 17

32. The Role of Government: Market Development Schemes 17

33. Good Statistical Reporting Increases Transparency 18

34. Energy Policy for Wind 18

35. Pricing of Wind Energy: The Electricity Feed Law 19

36. Grid Connection, Grid Reinforcement 19

37. Tax Treatment of Wind Turbine Investments 19

38. Favourable Financing Schemes 20

39. German Power Companies' Attitude to Wind Energy 20

40. The Energy Policy Role of Utilities 21

41. Market Size 22

42. Origin and Mainstay of the Market: Private Citizens 22

43. The Role of Publicly Financed R&D 23

44. Type Approval Requirements 24

45. Turbine and Component Suppliers 24

46. Employment 25

47. German Technology Concepts 25

48. Profile of a Success 25

CHAPTER THREE : THE WIND TURBINE MARKET IN THE UK 26

49. Wind Resources 26

50. Wind Generation Structure 26

51. The Role of Government: NFFO & SRO 26

52. The Role of Developers 27

53. Planning Procedures 28

54. Pricing of Wind Energy 29

55. Grid Connection, Grid Reinforcement 29

56. Market Size 29

57. Turbine and Component Suppliers 29

58. Employment 30

59. The Home Market's Role in Industry Development 30

60. Assessment of the UK System 30

CHAPTER FOUR : THE WIND TURBINE MARKET IN SPAIN 32

61. Wind Resources 32

62. Wind Generation Structure 32

63. Energy Policy for Wind 32

64. The Role of Regional Governments 33

65. Wind Resource Mapping 34

66. The Role of Developers 34

67. Turbine and Component Suppliers 34

68. Employment 35

69. The Home Market's Role in Industry Development 35

70. Assessment of the Spanish System 35

CHAPTER FIVE : SOME THOUGHTS FOR QUÉBEC 36

71. The Bare Essentials 36

72. Employment Creation from Wind Energy 37

73. Direct and Indirect Employment Creation 38

Estimates of Direct and Indirect Employment Distribution 39

74. Direct and Indirect Employment Effects 39

75. Summary on Employment 40

76. The Market for Wind Turbines 40

77. Exports or Local Manufacturing 41

78. Cost Decline for Wind Energy 43

79. Hydro-wind perspectives from Scandinavia 44

APPENDIX : PRODUCTIVITY GAINS FROM FIFTEEN RECENT

TECHNOLOGICAL IMPROVEMENTS 46

REFERENCES 50

INTRODUCTION

Several countries in the world are looking with increasing interest at wind energy, both for its use in

an environmentally sustainable electricity supply, and for its potential to create new economic

activity.

Today, wind prospecting, research and development, turbine manufacturing, and installation employs

more than 35,000 people worldwide, and the industry has become a 1.5 billion (USD) dollar world

industry. [41] The growth rate of the Danish and German part of the industry within the past 5 years

even exceed the growth rate of Nokia, Europe's largest mobile phone manufacturer, or the number of

servers on the Internet. [42]

This report consist of five papers: This general paper about employment, industry, markets and

technology, plus four country studies of energy policies, support mechanisms, markets, and industry.

CHAPTER ONE

THE WIND TURBINE MARKET IN DENMARK

1. Wind Resources

Denmark has relatively modest to good average wind speeds in the range of 4.5 to 5.3 m/s measured

at 10 m height, equivalent to typically 6.5 m/s at a wind turbine hub height of 50 m. (The highest

average wind speed at hub height onshore is about 7.5 m/s). Onshore wind resources are highest in the

Western part of the country, and on the Eastern islands with coastlines facing South or West. [1]

The country has very large offshore wind resources and large areas of sea territory (and economic

zones) with a shallow water depth of 5 to 15 m, where siting is most feasible. These sites offer higher

wind speeds, in the range of roughly 8.5 to 9 m/s at 50 m height. [2]

2. Wind Generation Structure

Wind development in Denmark is spread geographically throughout the country, although with

higher concentration in the windiest areas noted above. [3] Single wind turbines or, increasingly,

clusters of turbines are the most common siting method. There are comparatively few large wind

parks. The reason for this is partly the planning policy preferences (generally against large parks,

and favouring clusters), [4] and the Danish ownership restrictions which effectively (though not

intentionally) encourage single turbine siting. [5] 80 per cent of Danish wind power capacity is owned

by individuals or wind co-operatives. The rest is owned by power companies. [6]

3. Renewable Energy Policy for Wind

Denmark, which in the early 1970s was extremely dependent on (imported) oil, pursued a very active

policy of energy savings, increasing self sufficiency, and diversification of energy sources until the

mid 1980s. Since then, energy policy has increasingly promoted the use of renewable energy to

ensure environmentally sustainable economic development. [7]

Long term planning is considered to be important, with a planning horizon presently set at the

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year 2030 in the Government policy document "Energy 21". [8] The reason for this very long term

planning is to ensure consistency in policy, and to send strong signals to market actors about the

policy scenario in which they will operate. In the electricity sector, plant and equipment have long

lifetimes (e.g. transformers, transmission systems and generating plant). One important aspect of

present planning is to ensure that the future electricity system will be able to accommodate a very

large share of intermittent renewables.

Since the mid 1980s, the country has had an official goal of meeting 10 per cent of Danish

electricity consumption by wind in the year 2005, implying an installed base of 1,500 MW of

installed wind capacity. [9] It now seems likely that the target will be reached by the year 2000, and

new ambitious Government plans in the "Energy 21" policy document indicate that around 50 per

cent of electricity consumption should be covered by wind by 2030, most new installations being

located offshore.

4. The Energy Policy Role of Power Companies

The Danish Government has very wide-ranging powers to regulate utilities. Regulation takes many

forms, including energy efficiency and demand-side management (DSM) measures. Integrated

Resource Planning (IRP) is an integral part of the procedure through which power companies obtain

permission to install new generating capacity. Other measures include price and accountancy

controls1.

The Government has ordered the utilities to install 400 MW of wind power on land to date. The

first two orders of 100 MW each were issued in 1985 and 1990. The latest onshore order for 200

MW to be completed before the year 2000 was issued in 1996.2 In 1998 a new order was issued for 750 MW of offshore

wind power.

1Permissions to install new capacity are subject to strict environmental criteria! E!g! coal has been outlawed as a

fuel for new generating facilities! Danish power companies (mostly co"operatives) are tax exempt# provided theirannual accounts show no profits! Accountancy rules# however# provide generous depreciation allowances# which allowpower companies to depreciate $%& of the cost of new plant % years prior to investment! ['(] This effectively allowspower companies to collect funds for investment from electricity consumers before investments are made! ['']

2This is# of course# in addition to the existing and future cooperatively" and privately"owned turbines# which

account for the majority of wind generation in Denmark!

2

Wind turbine orders from power companies are filled by competitive public tendering. Formerly

the tenders were based on power companies doing an extensive part of site prospecting, installation,

and servicing work. Lately, turnkey contracts with manufacturers have become the rule, since they

are expected to be significantly less expensive for the power companies.

The use of turnkey tendering makes the process more similar to the NFFO or SRO system used in

the UK than what is generally realised.

5. Power Companies' Ownership of Wind Power

Danish utilities are mostly non-profit co-operatives owned by the electricity consumers in each

area, although some municipalities in the larger cities are the owners of distribution companies.

Ownership of distribution companies cannot be traded, but is implicitly held by the property

owners who consume electricity. Governing boards are elected locally. The distribution

companies jointly own transmission and generating companies.

The many local power companies operate an internal sharing arrangement for their wind energy

deployment, which means that they effectively pool their wind energy investments to ensure that

wind energy is deployed primarily in good, windy areas.

6. Attitudes to Wind Energy in Power Companies

Danish development of wind power could probably have been carried through with private (non-

power company) investment only, like in Germany. The primary advantage of power company

participation from a political point of view has been to ensure that expertise and renewable energy

commitment within power companies has been much larger than what would otherwise have been the

case. Until recently, however, there was a dividing line between an overall positive attitude at the

technical level, dealing with practical wind power implementation, and a more reserved attitude at

the political level of utility boards, basically resenting cost and tariff increases due to (costlier)

renewables.

The improving economics of wind energy has changed this: Power companies today realise that

wind is the cheapest option for meeting the (legal) environmental requirements for power

companies, the objectives of which are likely to remain on the political agenda for the foreseeable

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future.3 In this situation, the power companies have urged that the Government leave wind

development to power companies only, since with the present energy tax refund system, it is far

cheaper for power companies to produce their own wind power than to buy it from independent

generators. The average cost for power companies' own wind generation is around 0.28 - 0.34

DKK/kWh (0.04 USD/kWh). But since they get a CO2 tax refund of 0.10 DKK/kWh, their

generating cost is really 0.18 0.24 DKK/kWh. versus 0.30 to 0.37 DKK/kWh (0.05 USD/kWh) for

energy purchased from independents. [11]

It should be realised however, that these power company costs are quoted on the basis of a 5 to 6

per cent real rate of interest, and a 20 year project lifetime, and that the costs do not include grid

reinforcement. It should also be noted, that Danish infrastructure is characterised by a strong

electrical grid, and widespread local expertise in installation and planning. The extensive 20-year

experience with wind energy is indeed reflected in lower installation costs than elsewhere in Europe.

[12]

The strengthened commitment of Danish power companies to wind energy can be seen in their

eagerness to develop the first 750 MW of offshore wind power, where applications for planning

permission were launched even before the actual Government order was issued.

7. Public Service Obligations

The European Union directive on the liberalisation of electricity markets allow member countries to

impose a "public service obligation" (PSO) on electricity suppliers, which are allowed to shift the cost

burden onto consumers. The obligations may, for example, be related to ensuring universal service to

all consumers in a region at the same tariff , meeting obligations in relation to environmental policy,

or funding research.

In regard to renewables, the Danish legislation ensures that all electricity consumers effectively

have to share the excess cost, if any, of using renewables in the electricity system, in order to avoid

distortion of competition between suppliers. In practice this means that electricity generated using

renewables, or all forms of combined heat and power production (CHP) has a priority access to the

3Cf! Numerous press statement from the President of the ELSAM Utility Group# Egon Søgaard!

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grid.4

8. Municipal Planning

The policy of installing 1,500 MW onshore in Denmark has been considered a challenge for

municipal and regional planning, given the country=s high population density5. For the past few

years Danish municipalities have been required by a planning directive from the national Government

to make plans for wind turbine siting. [13]

Although no specific quotas were set by the national Government, most regions (counties) have

required municipalities with good wind resources to provide suitable sites for turbines. After the recent

round of planning with extensive hearing procedures for local residents, sites for more than 2,600

MW have been made available. [14]

The Danish system has inspired a similar system, which is being implemented in Northern

Germany. [15]

9. Advanced Wind Resource Mapping

To assist municipalities carrying out planning for wind turbines, a national wind map based on rough

manually prepared estimates was made available in 1991. [16]

A new and much more advanced method is being employed in 1997-98: Using the European

Wind Atlas Method (WAsP) developed by Risø National Laboratory, software from the leading

commercial wind software vendor Energy & Environmental Data, and detailed digital maps, a very

4It is up to utilities to implement a tariff structure which implements this. In the estern part of the coutry, the

transmission company ELTRA has implemented this using a tariff which reflects the energy mix during each period. Inwinter, when there is a lot of CHP-generated electricity and much wind, tariffs tend to be slightly higher than in summer.Large customers who have the right to purchase electricity from any generator in Europe effectively have to buy a mixtureof locally made prioritised electricity and imported electricity (plus transmission fees). [12]

5It is in fact a testament to wind power=s general acceptability that it has developed so powerfully in densely populated

countries like Denmark, Germany and the Netherlands (the second most densely populated country in the world, afterBangladesh).

2

detailed, automated analysis of the entire country (divided into cells of 100 by 100 metres, with

automatic assessments of terrain roughness out to 20 km distance) is being prepared.

The system already includes an exact mapping of all 4,800 wind turbines in the country, and the

results will be calibrated by production data from more than 1,500 wind turbines reporting to the

monthly statistics system run by the software vendor for the Danish Wind Turbine Owners'

Association.

10. Market Development Schemes

In the beginning of the 1980s the Danish Government instituted a number of successive market

development schemes, originally funding 30 per cent of investments in new wind turbines, but

gradually lowering this support until it was abandoned in 1989 (it was 10 per cent by then). [17]

11. Pricing of Wind Energy from Independent Power Producers

Power companies are by law required to pay for electricity from privately owned wind turbines at the

rate of 85 per cent of the local, average retail price for a household with a (high) annual

consumption of 20,000 kWh (effectively allowing a gross 17.6% markup on sales of electricity from

this source). [5] (The reason for the 20,000 kWh rule is that electricity prices in most areas include

rental fees for meters, but the tariff structure varies with the local distribution company).

The electricity price paid by power companies for wind energy from privately owned wind

turbines varies between 0.25 and 0.35 DKK/kWh (0.036 to 0.05 USD/kWh), reflecting the varying

prices of electricity from different local distribution companies.

The price is not substantially different from what would have been obtained under the time tariff

system applied to other independent power producers. Under that system the generator is paid

different rates, depending on whether deliveries are made during peak, medium load or low load hours.

Since wind energy production in Northern Europe tends to be highly correlated with demand (more

wind at day than at night, much more wind in winter than in summer), wind is actually some 40 per

cent more valuable in the grid, than if production were purely random. [19]

Originally the pricing arrangement was negotiated between the Danish Wind Turbine Owners'

Association and the Association of Danish Power Companies. In 1992 the power companies

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terminated the agreement, and subsequent negotiations with the turbine owners failed to reach a

compromise. After this, the Government and Parliament intervened and made a general law on

renewable energy, including a purchasing obligation with the tariff mentioned above.6

12. Partial Refund of CO2 and Energy Tax

Households in Denmark pay very high electricity prices, even though Denmark has some of Europe's

lowest generating costs for thermal

plant. The reason is an extremely

high indirect taxation of electricity,

as shown in the graph above. [20]

The political reasoning behind the

high taxation is to reduce pollution

emissions and encourage energy

savings. (The fiscal motive plays a

role as well, of course: "Green"

taxes are less resented by voters

than other taxes).

The electricity tax is collected

on all electricity sold to households, service businesses etc. Only manufacturing industry is to a

certain extent exempt from this taxation.7

Electricity from renewable sources gets a refund of the 0.10 DKK/kWh (0.014 USD/kWh) CO2-

tax [5]. This refund is paid regardless of whether the generating equipment is owned by power

companies, firms or households. This particular tax is called the CO2 tax. (The labelling of different

electricity taxes is historically somewhat random, depending on whether the originally declared

political aim was environmental or fiscal).

6The events are descibed in detail in an article by the Danish Wind Turbine Owners= Association, Flemming Tranæs,

posted at the internet address http://www.windpower.dk/articles.

7Under very complex rules which graduate the tax according to the use of the energy. Heating is taxed like household

use, while process use is taxed very lightly. Companies which embark on particular energy savings programmes may bepartially exempted from the tax.

2

13. Special Rules for Private (Individual or Co-operative) Owners

Wind turbines owned by non-power companies, i.e. other firms, individuals or co-operatives, in

addition get a refund of 0.17 DKK/kWh (0.024 USD/kWh) of electricity tax. [5] The size of the

refund has been set to ensure a reasonable profit for wind turbine owners, given existing tax

regulations. On the other hand, there is currently some political concern that the profitability of

wind energy is "too high" on the very best sites. [21] Some future adjustment, primarily concerning

these sites cannot be excluded.

Total remuneration for private (non-power company) wind turbine owners varies between some

0.5 and 0.62 DKK/kWh (0.071 to 0.089 USD/kWh).

The basic reason for treating power companies and other turbine owners differently is that power

companies in Denmark are tax free, provided that they do not make a profit. (Generous accounting

rules allow power companies advance depreciation, which effectively ensures, that they are tax free,

"non profit" institutions. They are allowed to collect investment financing in their tariffs, before

investments are actually made, thus obviating the need for shareholders or other external sources of

finance).

14. Grid Connection, Grid Reinforcement

According to the Executive Order on Grid Connection of Wind Turbines of 1996 [5], local power

distribution companies are obliged to provide grid connection facilities at any site which in municipal

planning has been set aside for the development of at least 1.5 MW of wind power (rated generator

power).

In other cases, power companies are obliged to allow grid access to the local 11-20 kV grid, but

the turbine owner is responsible for paying for the extension of the grid to reach the site in question.

The power company has to pay for the entire grid extension, however, if the cabling can be used for

other purposes in the normal extension of its grid facilities.

The necessary reinforcement of the grid is paid for by the power company, unless the power

company can prove that the reinforcement in the area is particularly uneconomic. The Danish

Energy Agency (part of the Ministry of Energy and the Environment) is the authority to whom

2

prospective turbine owners may appeal power company decisions on these matters.

Wind turbine owners have to pay for the transformer to connect to the 11 kV grid. In addition a

fee for rental of electricity meters apply. (Reactive power consumption is not charged, but turbines

generally have to observe a certain phase angle [27]).

15. Tax Treatment of Wind Turbine Investments

Wind turbines are treated like machinery in industry, i.e. a declining balance 30% annual depreciation

is allowed.

Wind turbine owners may alternatively (once and forever) opt for a simplified tax system, being

taxed on 60% of gross revenues from electricity sales exceeding 3,000 DKK/year (450 USD/year)

without any depreciation allowance or any deduction of other costs. This means that people who

only own a few shares in a wind turbine co-operative are not taxed on their wind turbine income.

16. Limitation on Private Ownership

The private (non-power company) ownership of wind turbines in Denmark is limited by regulations

in the executive order on national grid connection rules, requiring that members of wind co-

operatives be resident in the municipality where the wind turbine is located, or in a neighbouring

municipality. [5] Municipalities make exceptions for individual wind turbine projects, but exceptions

are fairly rare.

The regulation also limits the number of shares residents may own in a wind turbine co-operative

to an annual production of 30,000 kWh per (adult) person, corresponding to a total investment of

some 120,000 DKK (17,000 USD).

These restrictions were allegedly made "to prevent the misuse of Government support schemes

for wind energy" (quote from the Minister for Energy and the Environment in Parliament), but the

basic political aims are probably to preserve local ownership of the exploitation of a natural resource,

much like it is practised in Danish agricultural legislation which requires that farm owners be resident

on their farm.

Individuals may own one wind turbine located on the same property on which they are resident

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(no size limit). The ownership of a complete wind turbine and co-operative shares are mutually

exclusive.

The quantitative restrictions on independent power production were likely imposed as a result of

visibly strong political pressure from power companies.8

17. Market Size

The total installed base of wind power was some 1,100 MW at the end of 1997, making Denmark the

third largest wind power country in the world after Germany and the USA. Almost 300 MW were

installed in 1997, making it another record year for installation of wind power (with 200 MW and 98

MW in the two previous years).

18. Turbine and Component Suppliers

All of Denmark's 4,800 wind turbines (end 1997) have been manufactured domestically. Denmark

hosts five of the world's ten largest wind turbine suppliers: NEG-Micon, Vestas Wind Systems, Bonus

Energy, Nordex, and Wind World. The first three companies account for more than 50 per cent of

world production of wind turbines measured in MW. Most of these companies have a background in

agricultural machinery manufacturing, with the exception of Wind World which was founded on

gearbox and marine technology manufacturing.

Competition in the Danish market is definitely the toughest in the world, making the market

rather uninteresting to foreign turbine suppliers. Another problem facing some foreign suppliers may

be the very stringent safety regulations which e.g. require two independent failsafe braking systems

on turbines, one of which must be aerodynamic, or providing equivalent safety.

The Danish component industry includes LM Glasfiber, which is the world's largest rotor blade

manufacturer, with an employment of more than 1,000. Danish manufacturers of electronic wind

turbine controllers likewise have a very large market share world wide. Other component

8It is somewhat doubtful whether these regulations are in accordance with EU rules on the free movement of capital,

since they effectively prevent cross-border ownership.

2

manufacturers include suppliers of braking systems, hydraulics, etc.

19. Employment

Denmark is home to 60 per cent of the world's wind turbine manufacturing capacity. Presently about

2/3 of production is exported. The Danish wind turbine manufacturers presently employ some 2,200

persons, in Denmark, while domestic component and service suppliers employ another 10,000

people (1997).9

In addition, another 4,000 - 5,000 jobs are created abroad through deliveries of components, and

installation of Danish turbines. These figures do not include assembly work etc. done in foreign

subsidiaries or licensees of Danish firms.

20. The Home Market's Role in Industry Development

The Danish home market is what created the modern Danish wind industry originally, and gave it the

testing ground to sort out both wind technology and manufacturing technology, including the

important issue of quality control.

When the Great California Wind Rush started in the early 1980s, the Danish companies were

practically the only ones in the world with a substantial track record. The result was that investors

tended to prefer Danish machines, which in the end made up around half of the capacity installed in

California. The importance of the learning process within the major Danish manufacturing

companies from manufacturing thousands of machines for the California market cannot be

overestimated.

21. The Danish Concept

9These figures are a cautious estimate updating an extensive input-output analysis study conducted in 1995 by the

Danish Wind Turbine Manufacturers Association. [18]

2

The track record of the early Danish machines in California has in general been better than those of

the competitors, leading to yet another track record advantage. The result is, that the so called

"Danish Concept" in its newer and more refined versions today dominates the international wind

turbine market more than ever, despite occasional revolutionary technology predictionsin the press.

The last company manufacturing vertical axis machines (Flowind) went bankrupt in 1998, and

manufacturers who used to stick firmly to a two bladed concept (WEG, Nedwind and Lagerwey) have

all launched new three bladed designs.

As matters stand at the time of writing, it appears that the "Danish Concept" consisting of a

three bladed upwind design with fixed speed operation and direct grid connection rules about 75 to

80% of the market. [23] This design dominance resembles the status of the 4-stroke petrol engine

which has actually been around since 1856.

Whether other designs (full variable speed operation, indirect grid connection) will penetrate the

market is largely a matter of component costs, in particular the costs of power electronics. There is,

of course, a bit of circularity in this argument: Costs will decline with large scale manufacturing, so

nothing is given about future technology in this area. It seems likely however, that the present basic

design will dominate the market well into the next century.

22. Can the Danish Industrial Success be Replicated?

The Danish success in wind energy is not easy to replicate elsewhere, and certainly not with the same

means. Technology development is different today, markets and competition are different, and in

some sense the Danes were fortunate enough to be in the right place at the right time with the right

concept.

Starting from scratch is much more difficult today, when the largest market segments have

tougher competition, with a more mature and reliable technology. The same market segment requires

large machines with larger capital requirement and higher development risks.10 Furthermore, there

currently are no fundamentally revolutionary turbine technology concepts in sight, i.e. demonstrably

10

The technological innovation process and different design strategies in the wind turbine industry are thoroughlyanalysed in [22]. A summary of the major design options can be found on the web site of the Danish Wind TurbineManufacturers Association, http//:www.windpower.dk/tour/design

2

economically superior technologies, although there are many options for further development and

cost cutting within the major variants of present technology. [24]

Manufacturers in several countries have chosen to link up with Danish manufacturers in a variety

of joint ventures. This coupling has included significant technology transfer to local companies, and

developed local manufacturing. Most of the licensees have a machinery and equipment manufacturing

background. The primary advantages of a technology link to an existing manufacturer is to acquire

proven technology, and the possibility of being able to offer a more complete and continuously

optimised model range.

23. Origin and Mainstay of the Market: Private Citizens

Denmark is somewhat unique among wind turbine markets, since the market really grew out of a

popular interest in alternative generating technologies, partly in opposition to the use of nuclear

power, partly as a result of the energy supply crisis in the late 1970s, when oil prices skyrocketed due

to OPEC action and political and military unrest in the Middle East.

Private individuals, either as members of wind energy co-operatives, or as whole owners of a wind

turbine (farmers) account for about 80 per cent of installed wind power capacity in Denmark.

(Almost 900 out of 1100 MW of installed wind power capacity at the end of 1997). 100,000

families in Denmark own shares in a local wind turbine, and almost 2,000 wind turbines are owned by

individuals.

Wind co-operatives are organised as unlimited partnerships, but since the turbine and its

installation is usually completely paid up, partnerships have no loans and no (joint) risk in this

respect.

24. The Benefits of Thorough Statistical Coverage

Wind turbine owners are highly organised in the Danish Wind Turbine Owners' Association which

publishes a monthly magazine giving production figures and notes on technical failures for more than

1,500 turbines. This excellent statistical data base, plus user groups, and technical consultancy

services for members has been a very important instrument to ensure a transparent market with

tough competition between manufacturers.

2

Turbines are usually sold with 5 years guaranteed production (insured with insurance companies).

This makes all manufacturers keen on not overstating expected production, as this would bounce

back in the form of a higher risk premium for that particular brand from insurance companies.

25. The Role of Publicly Financed R&D

In stark contrast to Germany, Sweden, the USA, Canada, and the UK, publicly financed R&D projects

played a relatively minor role in initiating the early development of the Danish wind turbine

industry. [25] The early stimulus came in the form of investment grants, supporting market

development for small scale privately owned turbines, (5 to 11 kW) which typically covered their

owner's annual electricity consumption, by a factor of 2 to 4.

Later, the Danish Government and the European Union have financed a significant number of

basic research projects, and given some support to development projects. It is estimated that a staff

of about 60-80 people in Denmark (including both researchers and administrative staff) work on

(partly) publicly financed R&D. Danish wind turbine manufacturers have a staff of about 100 people

working on technology development. Total public support for this work is below 2 million USD/year.

26. Type Approval Requirements

In the late 1970s Risø National laboratory (whose original task was nuclear research) was charged

with type approval of wind turbines which could be installed with public investment grants. The type

approval process was extremely useful for weeding out low quality and potentially dangerous

products, and put a pressure on manufacturers to upgrade their design and manufacturing skills. [22,

25]

Risø's very strict safety requirements, its demands for physical testing of rotor blades, and

conservative norms for load calculations, indirectly saved the core Danish manufacturers from the

fate of many foreign competitors whose turbines collapsed in these early days. The result was very

sturdy and stable, but rather heavy machines. (The potential for weight saving has in fact been so

large, that Danish wind turbines have shed half their weight per kW power installed during the past 5-

10 years, despite a 50 per cent growth in their physical size).

2

27. The Role of Risø National Laboratory and Others

Risø has since the early eighties evolved to become probably the foremost international research

institute on basic research in wind turbine technology and wind resource assessment.

A much smaller, complementary Institute of Fluid Dynamics developed at the Danish Technical

University. Its parallel development of turbine design software has served as a commercial tool in

many companies, and as an important tool to ensure mutual verification of its own and Risø's

methods of aeroelastic analysis.

28. The Role of Power Companies in R&D

Danish power companies played a pioneering role in the early technology development of wind

energy. When the Danish Government instituted a publicly financed wind energy research

programme in the mid 1970s, the power companies once again became involved in wind power

research, concentrating on relatively large machines for their time (630 kW), and building two

experimental wind turbines near the town of Nibe around 1979 (one pitch, one stall controlled).

These machines were finally closed down in 1997. In the early 1980s another group of five 750 kW

machines were built, and during the 1990s another two experimental machines of 1 and 2 MW were

built.

The primary aim of these ventures appeared to be the training and development of in-house wind

energy expertise in the power companies, rather than aiming at commercially relevant equipment.

29. Is the Danish Market System an Economic Success?

The Danish market system for wind energy has been a popular success, in regard to the public's

possibility of direct involvement in energy policy.

The power company share of the market (determined by Government orders to power

companies) has worked reasonably well, except for the fact that power companies have been

2

threeyears behind schedule in fulfilling their obligations (with no consequences for them)11.

The refund of 0.10 DKK/kWh (0.014 USD/kWh) for power companies has apparently

been based mostly on political considerations of the name "CO2 levy" which was a convenient

amount to refund. Since then SO2 taxes have been implemented without any talk of a similar refund

to wind. Today the 0.10 DKK/kWh roughly compensates for the difference in average generating

costs between wind and fossil fuel plant.

30. Rationing Gives Questionable Market Efficiency

The Danish wind energy support system has lately come under political attack for being too generous

to private wind turbine owners, and conversely unnecessarily expensive in terms of energy tax

refunds. The attack has been justified by reference to the capital gains (land rents) for windy sites.

The timing of the attack is directly related to the discovery of the regulatory loophole described

above, which created a record boom in turbine investment in Denmark. (The boom was reinforced by

the fact that the authorities by accident warned about a change in regulations beforehand, thus

creating a virtual "buying panic before closing time").

This has been a clear demonstration of the fact that the "segregation policy" which had

effectively excluded anyone but farmers from owning their own wind turbine, had the effect of

keeping less risk averse (and more bankable) investors out of the market, and of keeping yield

11

The first two orders to power companies were not legally executive orders, but the power companies "volunteered" toput up two times 100 MW, and entered into an agreement with the Ministry of Energy without a penalty clause, thusavoiding a legally enforceable executive order. The power companies say that difficulties in obtaining planningpermission was the reason for their late compliance. The present 200 MW order and the 750 MW offshore order are in factexecutive orders, but are referred to as agreements in power company publications. The reason for using executive orders(other than the enforcement aspect) is the EU directive on the free electricity market, where it is important that the utilitieshave the legal right to consider excess costs of renewables as a "Public Servce Obligation", whose cost may be included inelectricity tariffs.

2

requirements (on the windiest sites) higher than necessary.

Likewise, the apparently acceptable price differential between negotiable shares in wind co-

operatives and non-negotiable shares gives an indication of the liquidity premium paid for the

"localness" of wind turbine ownership.

2

CHAPTER TWO

THE WIND TURBINE MARKET IN GERMANY

31. Wind Resources

Germany generally has modest average wind speeds around 4 m/s at 10 m height, but a few areas with

good wind speeds in the coastal regions of Northern Germany in Schleswig-Holstein, and part of

Niedersachsen. Inland, however, it is only possible to find good locations for wind turbines in areas

with hilly terrain, where one can rely on speed-up effects. An important offshore resource may be

found along the short North Sea Coast, and along the Baltic coast. [1]

32. The Role of Government: Market Development Schemes

Both the Federal Government and the individual states (Länder) have operated support schemes for

the investment in wind turbines. The most important stimulus on the federal level came from the

250 MW programme. This was a national support programme introduced in 1990, originally with a

100 MW target. In March 1991, after the first year of the existence of the programme, the original

target was exceeded, and therefore the programme was extended to 250 MW. [26]

The highly successful feature of this Government wind energy programme was an additional 0.06

DEM/kWh (0.034 USD/kWh) on top of the payments from power companies, according to the

Electricity Feed Law (Stromeinspeisungsgesetz), see below. This helped to kick-start the market until

it expired at the end of 1995.

Some additional 60 wind energy projects had been supported by a follow-up investment grant

programme from the Federal Ministry of Economic Affairs between 1994 and 1997. Apart from the

Federal support programmes for wind energy, several German Länder (states) introduced, during the

1990s, their own support schemes. Most of these support schemes have been phased out in later

years, and the remaining systems are almost symbolic.

2

33. Good Statistical Reporting Increases Transparency

An interesting and useful feature of the German market development support schemes has been the

requirement under the 100/250 MW Programme to report production, technical reliability etc.

closely for the supported turbines. This has led to an interesting set of annual statistics published by

ISET12. The reports are concerened with machine relaiability, causes and effects of failures, plus

verification of wind climate assessments and power curves. Another statistical data base reporting on

the production of wind turbines, comprising more than half of all operating wind turbines, is managed

by the independent engineer's office IWET. In many ways this data base resembles the system

operated by the Danish Wind Turbine Owners' Association, and it has been a good way of increasing

market transparency. [15]

Like Denmark, Germany has a very strong free trade tradition, and its carefully planned support

system did not (and does not) discriminate in favour of domestic suppliers. Its market development

programme, however, has been well coordinated with its R&D support programme, and its subsequent

Eldorado export promotion programme to support developing countries, and has created a viable

industry, as explained later. Under the Eldorado programme, some 22 million USD had been spent for

wind energy between 1991 and 1997. [15]

34. Energy Policy for Wind

Contrary to the Danish long-term policy approach, there has been no coherent official German

policy for renewable energies. The main reasoning for a pro-active approach on renewable energy is

Germany's strong commitment tocut carbon dioxide emissions by 25 per cent between 1990 and

2005. Speaking on the importance of the Stromeinspeisungsgesetz, the German Ministry of

Economic Affairs writes: "An official bonus may be granted to environmentally friendly energy

sources. This is possible ... by introducing a legal obligation whereby electricity generated from

renewable energy must be purchased by the utilities at a fixed price, which is higher than the costs

incurred by the purchasing utilities."13

12

Institut für Solare Energiversorgungstechnik, Verein and der Universität Gesamthochschule Kassel e.V.

13

The German Ministry of Economic Affairs (Bundesministerium für Wirtschaft) is know as the first and foremost

2

35. Pricing of Wind Energy: The Electricity Feed Law(Stromeinspeisungsgesetz)

The Electricity Feed Law from 1991 requires German power companies to pay 90 per cent of the

average retail electricity price for final consumers (household, commercial, industrial) (ex. tax) for

wind (or solar) generated electricity supplied to the grid. [26]14

Since electricity prices in Germany are very high15, electricity tariffs for wind energy are quite

high. These tariffs are sufficient to ensure profitability of wind energy on a good site in the coastal

regions, and increasingly even with the moderate wind speeds prevailing in the inland areas. However,

most turbines in the inland areas need some additional financial support due to the low wind speeds.

36. Grid Connection, Grid Reinforcement

Contrary to the Danish regulations, turbine owners in Germany have to pay for any costs incurred by

grid reinforcement or extension caused by wind power. These costs can be quite substantial, especially

in the rural areas of Northern Germany with a comparably better wind regime than inland. Due to the

lack of legislation for grid reinforcement and grid extension costs, as in Denmark, and due to the low

transparency of the German utilities in regard to transmission and distribution costs, many projected

wind farms in northern Germany have problems getting started.

37. Tax Treatment of Wind Turbine Investments

bastion of free market and free trade thinking in Europe. This quote is politically remarkable in the sense that it justifiestinkering with the market mechanism. Germany, like Denmark, has in principle favoured a universal European Union wideenergy/CO2 tax.

14

The remuneration rate is lower, between 65 and 80 per cent, for other renewable technologies, including small hydro,landfill gas, sewage gas and various biomass sources and technologies.

15

This is mainly due to the monopolistic structure of the electricity industry for more than half a century, although alsoto an historical preference for domestically mined coal for power generation. [15]

2

Wind turbines are treated like any other investment in Germany, including higher depreciation

allowances in the initial years. General (non-wind-specific) incentives for investments in Eastern

Germany apply until the end of 1998.

38. Favourable Financing Schemes

Agricultural financing institutes which offer low interest loans for agricultural investment may

frequently be able to finance 90% of a farmers' wind turbine investment.

German investors are offered several favourable loan facilities to attract capital for wind power

and other renewable energy projects.

The Deutsche Ausgleichsbank (DtA) is a federal institution under public law with the majority of

its shares owned by the European Recovery Programme (originally the “Marshall”) Fund (EPR). The

DtA/EPR Fund has granted low-interest loans to small and medium-sized companies since 1990 for

installations using renewable energy. The average lowering of the interest rate on these loans is

between one and two percentage points. Furthermore, interest rates are fixed for the entire duration

of the loan which may be up to 20 years (but usually does not exceed 12 years). A maximum grace

period of five years can be agreed in order to protect the liquidity of the investor, particularly during

the early phase of the development. This instrument has proven especially effective to ease

investments in wind power. The loan approvals, for all renewable energy, amounted to more than 2.2

billion USD between 1990 and mid-1997. Within five years (1990-1995), more than 1500 wind

energy projects had been granted ERP loans totalling more than 500 million USD in conjunction

with complementary DtA loans totalling some additional 300 million USD. [15]

About 80 per cent of all existing wind turbines have been supported by DtA's environmental

protection loans.

39. German Power Companies' Attitude to Wind Energy

German power companies resent the obligation to give what they consider is an excessive price for

electricity from renewables. The large, super-regional electricity company Preussen Elektra, in

particular, has been complaining about uneven burden sharing, and alleging that environmental policy

2

is not part of the obligations for German power companies in their monopoly charters which were

granted by the Third Reich. However, the reformed German electricity law puts an end to the closed

monopoly charters and clearly expresses in its preamble that environmental protection is one of the

three pillars of German electricity suppliers.

The German Electricity Feed Law (Stromeinspeisungsgesetz) does provide a "hardship clause"

which allows local distribution companies faced with large cost increases to shift the excess cost of

their power purchasing obligation to the regional power company.

However, this option has never been used by the local or regional companies. An amendment of

the law, coming into force probably in spring 1998, puts this hardship clause into more concrete

terms, at the same time indirectly introducing a cap to the further expansion of renewable energy in

the electricity sector. The obligation for utilities to pay the tariff set out in the Electricty Feed Law

has been limited to only 5 % of their total electricity supply mix. This effective cap on wind energy

is designed to protect regional utilities in windy areas against excessive financial burden. Once the

volume of renewables exceeds 5 % of such a utility's sales, it can pass the exceeding amounts to the

supra-regional utility, e.g. Preussen Elektra16. Once the supra-regional utility has reached the 5 %

limit, additional renewable energy power would no longer receive premium payments. The super-

regional power company, has no way of shifting its obligation to other regional companies.

In sum, utility companies in Germany are obliged by law to pay for renewable energy up to a

maximum of 5% of total German energy consumption.

Since 1994 German power companies under the leadership of Preussen Elektra have mounted a

joint attack on their power purchasing obligation through both the German Constitutional Court, and

through a complaint to the European Commission about unfair competition. Both initiatives failed,

and a subsequent political initiative in Bonn demonstrated an unusually strong bipartisan support for

the present environmentally friendly policy in the German Bundestag (Parliament).

More than 90 per cent of all wind turbines erected in Germany are owned and operated by private

citizens and investors, farmers, or co-operatives. In contrast to their Danish counterparts, German

electricity companies have never seen any government obligation requiring them to build wind farms.

16

Preussen Elektra controls the utility supply company Schleswag in Schleswig Holstein in Northern Germany, where10 per cent of electricity consumption is covered by wind.

2

40. The Energy Policy Role of Utilities

The political polarisation of power companies against renewables advocates is probably politically

unsustainable in the longer run. Right now an armistice prevails, since the German Parliament has

decided not to touch the present legislation for another two years. For strategic reasons it is likely

that the present power company attitude (displayed in public) will continue for some time, and a

complicating factor is definitely the liberalisation of electricity markets in Europe.17

If a reform of the present system comes about, it seems likely that there will be an attempt to

include some form of national sharing of excess costs of wind power, although the federal structure

and the constitutional complications surrounding the regional chartered electricity monopolies makes

this a difficult task. The idea of a nation-wide sharing system for utilities has been demanded in 1997

by the second chamber of the German Parliament representing the Länder, the Bundesrat. It has also

been advocated by the German Wind Energy Association.

41. Market Size

At the end of 1997 close to 2,100 MW of wind power was online in Germany, making Germany the

largest wind power country in the world. During 1997 a record high 550 MW (849 turbines) were

added to the installed base. This is a market growth of another 18 per cent, once again making

Germany the largest market for wind power in the world for the fifth successive year. Germany has

increased its installed wind power capacity by ten times in just five years.

Compared with an installed base of 56 MW in 1990, before the Electricity Feed Law came into

force, this is a 37-fold increase.

In the early phase of development most of the wind power was placed in the windy states

(Länder) of Schleswig Holstein and Niedersachsen in Northern Germany, but increasingly

development has been moving South into inland areas. More than half of the newly installed capacity

during 1997 was erected in the non-coastal regions. This is partly due to a delay and administrative

barriers (from a planning perspective) along the German coastline, but also due to a keen

environmental interest in the population throughout Germany. At the end of 1997, the Northern

17

It is noteworthy, however, that Preussen Elektra has recently entered into an agreement with the largest German windturbine manufacturer, Enercon, regarding the marketing of its products abroad.

2

region of Schleswig-Holstein has just passed half of its own official target of 1200 MW.

42. Origin and Mainstay of the Market: Private Citizens

Wind energy in Germany has been developed by private people (non-power companies) to an even

larger extent than in Denmark. Both wind co-operatives and individual farmers play an important

role in this respect. More than 90 per cent of all turbines are owned and operated by private

citizens.Power companies have only invested in a few very large experimental turbines, including the

3 MW Aeolus machine in Wilhelmshafen in the North.

Like in many other countries, the first 10 years from about 1980 was a long and tough haul by

private idealists, who occasionally hardly had assurance that they could receive payment for the

electricity delivered to the grid. Even so, some 25 MW were installed by 1989, before turbine

installation took off after the Federal Government started its market development programmes.

43. The Role of Publicly Financed R&D

Germany has a strong tradition for support of large scale projects in wind energy development,

mostly managed by the private sector, and culminating in the 3 MW GROWIAN machine in the

early 1980s (100 m rotor diameter). That particular projectfailed when the machine, which had cost

300 million DEM (170 million USD), encountered a blade failure after only 280 hours of operation.

Large German companies like MBB and MAN were active on the scene during that period, but

like their counterparts elsewhere, they left as public research money ran out.

Like elsewhere in the world, where the course was taken towards large machines only, it was

difficult to get follow up funding for subsequent projects. In retrospect, the political accent on large,

visible technology demonstration projects did not recognise the fundamental differences between

wind turbine and aerospace technology, both in terms of the large unknowns of turbine aerodynamics

and structural dynamics.

Interestingly enough, Enercon, a small engineering firm which started in 1984 without funding

from the large research programme, has succeeded to become the largest German manufacturer of

wind turbines, using its own gearless direct drive concept.

2

When the interest in renewable energy rekindled in the late 1980s, and several market support

schemes were in place by 1990, as mentioned above, R&D support to private industry became an

important instrument to promote German wind turbine manufacturing. The unification of Germany

added another possibility of supplementary finance through regional development incentives.

Industry co-operation with several university institutes, and consulting engineering firms made it

possible to create a fairly large number of companies, often as subsidiaries of traditional mechanical

engineering firms, such as Tacke, a gearbox manufacturer, or Husumer Schiffswerft, HSW, a shipyard.

German incentives, in fact, have been so strong and successful that they attracted the Danish

manufacturer Nordex to move its turbine development to Germany (Nordex-Balcke Dürr is now

majority-owned by German interests, and has manufacturing facilities in both Denmark and

Germany).

44. Type Approval Requirements

Germanischer Lloyd is one of the official type approval institutes for wind turbines in Germany. (Its

role has to some extent historically been similar to that of Risø in Denmark in the early years, being

the anchor point for much of the infant wind turbine industry). The type approval requirements have

also worked well to protect investors.

45. Turbine and Component Suppliers

In 1997 Germany accounted for about 18 per cent of world market production of wind turbines

measured in MW. About half of the installed base of wind power in Germany has been supplied by

domestic companies, although distinguishing between domestic and foreign turbines is not

straightforward, since all the major Danish manufacturers have assembly facilities or license

manufacturing in Germany, and since Nordex-Balcke Dürr is now 51% German owned.

Germany actually has a net surplus on its "wind turbine balance of payments", since the

companies Flender (gearboxes), Siemens (generators), and AEG (electrical components) have very

large market shares (close to 50 per cent) for their products in the wind turbine industry worldwide,

including Denmark. Other components manufactured in Germany include ball bearings and roller

bearings (FAG), yaw motors and gears, and yaw wheels.

2

The bankruptcy of Germany's second largest company, Tacke Windtechnik, in 1997 (partly due

to a series of technical failures) increased the foreign market share on the German market in 1997.

Tacke has since the been taken over by the American developer and turbine manufacturing firm

Enron Wind Corp., a subsidiary of the energy conglomerate Enron18.

The German wind turbine industry today consists of Enercon, Tacke, and a dozen smaller firms,

which are repeatedly going through a takeover and merger period. The two large firms account for

about 85 per cent of German turbine manufacturing.

46. Employment

The German Wind Energy Association estimates that employment in the German wind industry is

around 12,000 persons, or roughly equal to Danish employment in the area. German wind technology

manufacturing is more directed towards the employment intensive component area than in Denmark.

47. German Technology Concepts

Most manufacturers in Germany have stuck to wind turbine designs resembling the classical "Danish

Concept". The largest German manufacturer, Enercon, however, has its own multi pole synchronous

generator design with indirect grid connection (using power electronics), which has managed to

capture about 30 per cent of the German market, but which has failed to take major market shares

abroad.

48. Profile of a Success

After a misguided start in the early eighties, the German wind energy programme has largely been a

success for the past 7 years. In the view of the German Wind Energy Association, the success is

largely attributable to:

18

Enron Wind Corp also took control of Zond, a major wind energy player, in 1997.

2

! the Electricity Feed Law (Stromeinspeisungsgesetz) of 1990,

! federal support programmes (100/250 MW Programme) between the early and mid-

1990s,

! various support programmes by the German Länder until recently,

! preferential loan and financing schemes (investment allowances and preferential

depreciation schemes), and

! privileged status for wind power in the building codes.

2

CHAPTER THREE

THE WIND TURBINE MARKET IN THE UK

49. Wind Resources

The United Kingdom has the largest wind resource of any country in Western Europe. The best

areas, with average wind speeds from 9 to 10.5 m/s at 50 m height, are located on the coastlines

facing West and South, and particularly on rounded hills with an open view in the Southwesterly

direction.

The inland resource is more uneven, but generally good. Only a tiny fraction of the UK wind

resource of at least 340 TWh/year has been exploited so far. [1]

50. Wind Generation Structure

Wind resources are mostlyexploited in large wind farms, and quite concentrated in the windiest

corners of the country (Wales, Scotland, Northern Ireland). Parks are owned by developer companies

(though often ultimately financed by power companies, who own most of the leading developers).

Like elsewhere, this structure is a consequence of the institutional setup.

51. The Role of Government: NFFO & SRO

Until 1990 there was only a handful of wind turbines in the UK, which had no special regulations

concerning purchasing of wind energy. Effectively that meant having to accept the electricity "pool

price" of about 0.03 USD/kWh, which meant that wind energy was only economically interesting for

2

firms with the ability to use the electricity themselves.19 [27]

The introduction of the Non Fossil Fuel Obligation, NFFO, for England and Wales in 1990 and

the Scottish Renewable Order, SRO in 1995, however, started a significant market growth in leaps

and bounds. In 1997 the UK was the sixth largest market for wind energy with new installation of 55

MW.

Under the NFFO scheme the regional electricity companies are obliged to buy a certain amount

of renewable based electricity. Contracts to supply the electricity are awarded on the basis of a fairly

complex competitive tendering system with separate bands for different technologies. The

conditions and methods of awarding (conditional) contracts and determining prices has changed

between each of the (mostly) biannual "rounds", but basically contracts are awarded on the basis of

the lowest price per kWh.

The changes in regulations stem largely from problems of "contract hoarding" by some

developers, unnecessarily high prices due to "last accepted bid" pricing20 and project realization time

schedules too tight to cope with the extremely time consuming land-use planning process in the UK.

The producers are paid by the regional electricity utilities which in turn are reimbursed for their

excess costs by the proceeds of the non-bypassable fossil fuel levy, primarily (~90%) intended to pay

off stranded debt from nuclear assets (that part of the levy is being phased out at present).

Contracts are currently awarded for 15 years with indexation of the "bid price", i.e. at the price

at which the contract was awarded. Earlier projects had the problem, that the long planning period

shortened the period with guaranteed prices. In the latest round, a 5 year grace period has been

included before the 15 year contract period begins.

52. The Role of Developers

19

In that case they could save the retail price of electricity, which of course is substantially higher (about 100% more)than the pool price.

20

The >=market clearing price== approach, generally used to determine prices paid to generators in electricity powerpools.

2

The NFFO/SRO bidding process has almost become a science of its own, and the vast majority of

market players are UK developer companies, mostly subsidiaries of large power companies, but also

some independent developers and a few wind turbine manufacturers. It is worthy of mention that

because developers buy from wind turbine manufacturers on a competitive basis, manufacturers tend

to stay away from the bidding process, not wanting to compete with potential customers.

For all practical purposes, non-manufacturer developers today form the core of the UK wind

industry, and one consulting engineering firm has had some success in developing considerable

engineering expertise in this area.21

This developer "layer" is a fairly unique feature of the UK market, although it is similar to the

US wind development, particularly in California.

53. Planning Procedures

The growth of the developer sector is partly a result of the UK bidding process, partly a result of the

very long and complex planning procedures and environmental assessment system used in the UK.

Wind farm projects often take up to 5 years from the bidding stage to the operational phase, creating

some awkward results in the process.

For example, projects originally designed for 300 kW machines have matured around the time

when the 600 kW generation of wind turbines is the most economic solution, with the result that

turbines have to be placed on extremely low custom made towers to fit the dimensions originally

applied for in the local planning process.

Another peculiar feature of the interaction between the UK planning system and the competitive

bidding process is the "clustering problem": The tough competition between developers for low kWh

prices means that wind prospecting, far from being almost a public good, as in Denmark, becomes an

important competition parameter. Each developer runs his own wind measurement programme, and

for simple geographic reasons developers tend to end up in roughly the same windy corners of the

country. If several developers win contracts on adjacent sites, only one will proceed (at the most),

since planning authorities apparently use an unwritten "interpark visibility rule" according to which

21

Garrad Hassan & Partners.

2

one should not be able to see a wind park from an adjacent one.22

More than 700 MW of contracts have been awarded under the NFFO system, which have not yet

materialised as actual projects. The success rate for contracts is estimated to be around 30% to 50%,

due to the planning and environmental assessment procedures.

54. Pricing of Wind Energy

The kWh price for contracts has been declining considerably during successive NFFO rounds, arriving

at figures around or below 0.05 USD/kWh. The graph below gives the weighted average of costs in

UK pence per kWh for each of the succesive NFFO and SRO rounds. The figures have been

normalised to represent 15 year contracts (which is the rule today) [29].

The decline in prices reflects the universal decline in wind energy costs in all countries, and is

discussed further in the conclusions. The price decline, however is more visible in the UK, because it

does not operate a fixed renewables tariff system like Denmark, Germany, or Spain. In the last three

countries, the cost decline has primarily been reflected in growth in turbine installations, because it

22

In general, visual aesthetics are the only major issue with planning authorities in the U.K.

2

has become economic to install turbines on many more sites.

55. Grid Connection, Grid Reinforcement

These costs are part of project costs for the developer.

56. Market Size

The total installed base of wind power was some 328 MW at the end of 1997. 55 MW were installed

in 1997, against 73 and 40 MW in the two previous years.

57. Turbine and Component Suppliers

Britain has been home to a number of small, and fairly innovative wind turbine manufacturers

including Carter, and WEG, (Wind Energy Group). The companies have failed to win major sales;

Carter, a manufacturer of a flexible 2 bladed downwind design, folded in 1996, while WEG, a

manufacturer of two bladed machines, was resuscitated about 1995, following an initial bankruptcy.

The firm made a comeback with a 3 bladed "soft" downwind design which has as yet apparently failed

to win major sales. The company was acquired by Danish NEG-Micon in 1998 together with its sister

company Taywood Aerolaminates, makers of wood epoxy blades, and suppliers of blades for the 1.5

MW NEG-Micon machine. Brooks Crompton (a generator manufacturer) is another example of a

(smaller) turbine component manufacturer.

58. Employment

The British Wind Energy Association, BWEA, estimates that around 2000 jobs are created directly

and indirectly by wind power development in the UK. In general, job creation opportunities have not

materialized as much as elsewhere. This is due largely to the low project success rate discussed above,

which increases the costs and risks of doing business. Most foreign wind manufacturers have prefered

to export turbines and components rather than set up manufacturing facilities in an unstable market.

2

59. The Home Market's Role in Industry Development

Job creation in the UK market has primarily been in the tertiary sector, i.e. development,

consultancy, finance, legal, and planning issues - plus, of course, installation work. This latter

component has been quite significant, given the often difficult accessibility of UK sites in high wind

areas.

60. Assessment of the UK System

The UK system is generally considered successful in bringing prices down by British developers, and a

number of foreign observers who point out that the bidding process ensures a very effective use of

public funds.

The drop in kWh prices in successive NFFO rounds may partly be due to increasing competition,

but there is probably also an element of speculation in future price reductions for wind turbines, given

the 5 year grace period. Another element in low prices may be advantageous financing from

utilities.23 Finally, privatisation of the regional electricity companies increased their capacity to

absorb larger depreciation allowances from capital investments.

From a planning perspective, however, the system has been less successful, since it is very

difficult to predict from the beginning of the bidding process which projects will end up receiving

planning permission in the end. Therefore, there is also a very substantial uncertainty looming over

the number of MW which will actually materialise as real projects out of each bidding round.

The relative lack of predictability and stability of the market, coupled with low project success

rates due to geographically-overlapping bids, has made it difficult for turbine manufacturers to justify

using the UK as a manufacturing base. Furthermore, the size of the market is definitely below the

critical mass required for it to work as a base for a national manufacturer.

23

Most of the the leading developer companies are owned by the electrical utilities. These companies have beenparticularly successful in successive NFFO and SRO rounds. Judging by their bids, it appears that they have access tocheaper finance than other players. The privatisation of utilities also led to a number of utilities having a large capacity toabsorb depriciation allowances. Finaly, it seems likely that utilities (like in many other countries) do not wish their corebusiness (power generation) to be taken over by other players.

2

The level of intermediation (the developer, legal, and consultancy layer) is clearly higher in the

UK than elsewhere. The complex UK planning process definitely increases costs. It is not entirely

convincing that the UK NFFO system should be more efficient from an economic (social cost) point

of view than systems in other countries, particularly if one considers the very high wind speeds in the

UK.

The problems of the multi-stage procedure (conditional contracts without final planning

approval) makes it extremely difficult to predict the final outcome of the NFFO rounds.

2

CHAPTER FOUR

THE WIND TURBINE MARKET IN SPAIN

61. Wind Resources

Spain has excellent wind resources, particularly in Andalucia facing the Southern Mediterranean, and

in Galicia, Aragon and Navarra in the North, facing the Bay of Biscay. [1] These regions tend to be

quite hilly or mountainous, thus adding an important component of speed up effects to local wind

speeds.24

62. Wind Generation Structure

Wind generation in Spain is located in (usually very large) wind parks in the windiest areas of the

country, where the density of parks is quite high, particularly around Tarifa in Andalucia (at the

Strait of Gibraltar). The development of wind energy in Spain started in 1991, but picked up speed

around 1994. About 500 MW were installed at the end of 1997. Approximately 250 MW were added

to capacity in 1997, and another 250 MW are expected for 1998 [23].

63. Energy Policy for Wind

The National Government has not set a declared target for wind, but several provinces in strongly

federalised Spain have set very ambitious targets, as mentioned in the next section.

The Spanish system for support to renewables is in many ways similar to the German system, i.e.

24

Typical wind speeds of 5.5 to 6.5 m/s at 10 m height are therefore not a good guide to actual wind speeds at windturbine sites, which may be substantially higher on ridges.

2

an open-ended system with guaranteed prices from utilities, and guaranteed power purchasing by the

utilities in the national grid. Wind and solar in 1997 received 12 ESP/kWh (0.065 USD/kWh)[26].

Unlike the German system, the excess costs of the premium payment system is spread on all

electricity users nationally. The system is very similar to the German system, but the whole spanish

national electric system has always had a compensation and equalisation system under which

distribution companies are required to balance revenues and losses. Spain has a common national grid,

which Germany does not.

It is planned that the system will be changed to a system which gives each technology a premium

over the electricity pool price, rather than a fixed amount per kWh. (The pool price is currently

around 9 ESP/kWh (0.05 USD/kWh)). The premium should reflect the relative environmental

benefits of each technology, much like the present Danish system. In addition, a competitive bidding

system is envisioned for large wind parks above 50 MW. No details on the future policy are presently

available.

64. The Role of Regional Governments

Regional governments are in many ways taking the lead in promoting wind energy in Spain. [30]

Regional governments are responsible for planning, and actual planning permits are issued by the

municipalities.

In the North, Navarra wants to cover 100% of its electricity consumption from renewables in 20

years' time. By the year 2000 wind should cover 25% of local electricity consumption (roughly 220

MW), the total being tripled to more than 600 MW by 2010.

Galicia wants 2,800 MW to be installed by 2010, a figure which according to many observers may

be too optimistic, given that the present grid capacity is around 600 MW. A strengthening of the

grid is, however, being planned.

As a member of the European Union, Spain is of course obliged not to discriminate on the basis

of nationality, and there is a free circulation of goods in the Union. Spanish provincial governments,

however, attach considerable weight to local employment, and with their strong hand on planning

permissions, have managed to entice many foreign companies to establish joint-ventures with local

industry.

According to one leading observer: "Regional support in terms of cutting red tape in exchange for

2

new jobs in their region, seems to be the solution in most parts of Spain".

65. Wind Resource Mapping

Spain has a national wind map, but its level of detail and quality is apparently insufficient for actual

planning work.

66. The Role of Developers

Large, international wind turbine developers are increasingly dominating the picture in Spain. The

major market actors are Seawest (USA), Tomen (Japan), Endesa-MADE (Spain), and Iberdrola

(Spain). The Spanish market is generally dominated by professional developer firms, much like the

UK.

67. Turbine and Component Suppliers

Spain accounts for about 14 per cent of the world production of wind turbines (1997), and three

Spanish firms are now on the list of top ten manufacturers worldwide, i.e. Gamesa, Endesa-Made and

Desarrollos with world market shares around 6, 5, and 3 per cent respectively. The three firms

accounted for around 85 per cent of wind turbine installations in Spain in 1997. [23]

Spain's largest manufacturer with a 36% share of the local market is Gamesa Eòlica founded in

1994, which uses technology from Vestas Wind Systems, and is a joint venture with 40% Vestas

ownership, while the other two shareholders are a regional development corporation, and a company

group manufacturing car and aircraft components.

Endesa-Made and Desarrolos have market shares of 29 and 21 per cent. Endesa is a utility, which

owns the turbine manufacturer Made. The design looks remarkably like a classical (1985) Danish

design. Desarrolos was originally a joint venture between the Spanish manufacturer Abengoa and U.S.

Windpower (U.S. Windpower later became Kenetech, which went bankrupt in 1996). These two

companies and the fourth Spanish manufacturer, Ecotèchnia, have their own technology which is

basically variations on the Danish concept.

2

Other companies have been or are being established in Spain, and some 80 companies are

estimated to take part in supplying components or services to this industry. Danish NEG Micon,

which has already been engaged in Spain through the joint venture Taim-Nordtank is currently

establishing a factory in Galicia in Northern Spain, while Danish Bonus Energy has entered into a

joint venture with a government-owned company, Bazàn which is known for its manufacture of ships

for the Spanish navy, diesel engines, steam turbines, and weapons systems. In 1997, after only two

years of operation, this company had captured 15% of the Spanish market.

Component manufacturing is growing rapidly in Spain. The world's largest supplier of rotor

blades, LM Glasfiber is now operating three plants in Spain, and one of ABB's two European wind

turbine generator factories is located in Spain.

68. Employment

No estimate has yet been made of the employment impacts of wind energy is Spain. However, it is

noteworthy that most outside wind manufacturers have established manufacturing facilities and in

some cases entered into joint partnerships, as this inevitable maximizes job creation in the host

country.

69. The Home Market's Role in Industry Development

The Spanish home market presently takes all of the production from Spanish manufacturers. Given

the strong domestic market growth of 90% per year over three years, and the fact that most firms

were established recentlythis is hardly surprising. In the longer term, Spain sees itself as a natural

stepping stone to South American markets for wind power development.

70. Assessment of the Spanish System

Spanish wind power development has been a dramatic success in terms of creating much local

employment. In time, Spanish wind turbine companies may be able to benefit on other markets from

the experience acquired during these boom years.

Despite a financing system roughly similar to the German regulations, the Spanish system creates

2

less of a problem for power companies, since costs are shared nationally.

2

CHAPTER FIVE

SOME THOUGHTS FOR QUÉBEC

71. The Bare Essentials

The basic requirement for establishing a viable local industry is that there is a driving force in terms

of a local market of a significant size in sight. This is particularly true for goods for which there are

high transport costs, such as wind turbines.

It appears that a threshold value of more than a hundred megawatts nameplate capacity per

annum (perhaps 100-150 MW/yr) is a key figure for local joint ventures with foreign partners, or

local manufacturing by foreign companies.

Stability and predictability are Asine qua non@ conditions for attracting foreign investment. A

commitment for at least 5-10 years is essential. The UK case underscores this, in the sense that there

are large promises of future contracts, but great uncertainty about which projects materialise. With a

50 MW very competitive market, no foreign manufacturer has found it worthwhile to invest there,

and nearly no domestic manufacturers have been able to survive.25 Likewise, the primary component

suppliers for the European wind turbine industry are not to be found in the UK.

Wind turbine component suppliers in Europe are primarily located in the major manufacturing

countries: Denmark, Germany, and increasingly Spain. Despite a foreign market share of around 50

per cent on the German wind turbine market, Germany has a healthy net export of wind turbine

components to e.g. Denmark. There is an important technology feedback between turbine

manufacturers and their suppliers.

Conditions vary from country to country, of course, and turbine manufacturers are used to

25

The exception being Taywood Laminates and WEG, which were resucitated by their owner Taylor Woodrow, asmentioned in the UK case study. These two companies have now been acquired by NEG Micon, (though only TaywoodAerolaminates for manufacturing purposes).

2

dealing with different national systems. It may be interesting, however, to indicate the views of

manufacturers elsewhere: In a recent26 official meeting between Chinese authorities and the Danish

Wind Turbine Manufacturers Association, the Danish manufacturers made a joint declaration

outlining the preconditions for local joint ventures very briefly thus:

! There must be a clear Government policy for wind

! There must be a regulated power purchasing system for utilities

! There must be sufficient confidence to draw up a medium-term business plan

! It is useful to have a local network of subcontractors for components

! There must be a recognised testing/approval procedure for introducing and approving

alternative components for turbines

! Regulations for establishment, investment, and operation of joint ventures must be

clear

! Finding the right partner for a joint venture

72. Employment Creation from Wind Energy

Like Hydro, wind is characterised by relatively large investment outlays up front, but low running

costs. Typically, installed generating capacity in MW has to be 2 to 3 times larger than for

comparable thermal plant for the same annual energy production, and roughly twice the size of most

Québec hydro facilities (which tend to be operated at a capacity factor of roughly 60%). The reason

is that the capacity factor for an optimally built wind turbine generally turns around 25 to 30 per

cent.27 Expanding generating capacity using wind will therefore lead to larger (and immediate)

26

21 April 1998, in Beijing.

27

Technically, one may build a wind turbine with a higher capacity factor by fitting it with a smaller generator for thesame rotor size. This means that the machine will be running during more hours of the year, but its